Remortgage with bad credit: what lenders look at

Yes, many borrowers with credit problems can remortgage, but fewer lenders are open to them and the rates and fees can be higher. Mainstream lenders often accept older or minor issues, while specialist lenders consider more recent or more serious problems. The type of problem, how recent it is and whether it is settled all matter.

Borrowers who are up to date with their current mortgage, and not borrowing more, can often take a new deal with the same lender without a full credit and affordability review. That can be a simpler route than moving lenders, though the choice of deals is limited to the current lender's range.

Lenders look at each type of credit problem differently. Late or missed payments on credit cards and loans are the most common and are often treated less strictly than missed mortgage payments. Defaults, county court judgments, debt management plans, individual voluntary arrangements and bankruptcy are each assessed against the lender's own rules on age and size.

Missed payments on the current mortgage carry the most weight, because they show how the borrower has managed the same kind of debt. Many lenders look closely at the last few years, so a single old problem that has been settled usually matters less than several recent ones.

Settled debts are generally seen more favourably than open ones. Lenders also look at the overall picture, including how much other credit is in use and whether the problems were linked to a one-off event, such as illness or redundancy.

The three main credit reference agencies in the UK each hold a credit file, and lenders may use one or more of them. Checking all three before applying shows what a lender will see, and errors such as old addresses, accounts that are not yours or settled debts still shown as open can be corrected with the agency.

Being on the electoral roll at the current address, closing unused accounts and keeping card balances well below their limits can all help. Making several full applications in a short time leaves hard searches on the file, so many borrowers use eligibility checks with soft searches first.

Specialist lenders focus on borrowers whose credit history does not meet mainstream rules, and they often work through brokers. They usually price by risk, so the rate depends on how recent and serious the credit problems are, as well as the loan-to-value. As the history improves, a later remortgage may open up a wider choice of lenders.

Mainstream lenders use credit scoring and tend to decline cases that fall outside their rules, even where the problem was small. A broker who arranges bad credit cases knows which lenders accept which issues, which can save failed applications. Brokers can be compared on the remortgage brokers page.

More equity in the home usually widens the choice for borrowers with credit problems, because a lower loan-to-value reduces the lender's risk. Some specialist lenders set lower maximum loan-to-value limits for more recent or serious issues, so the amount of equity can decide which lenders are available and the rate offered.

Borrowing more at the same time as remortgaging with bad credit narrows the choice further, and lenders look closely at what the extra money is for. A valuation that comes in lower than expected can also push the loan-to-value into a higher band, so a realistic estimate of the value helps when planning. Those using a remortgage to clear other debts are covered on the debt consolidation remortgage page.

Before applying, it helps to check all three credit files, gather evidence of income and any explanation for past problems, and work out the current balance, property value and early repayment charges on the existing deal. Lenders and brokers will ask when each problem happened, how much it was for and whether it has been settled.

Comparing a product transfer with the current lender against a remortgage elsewhere, on total cost, shows whether moving is worth the extra checks. Keeping all payments up to date in the months before applying also helps.